Here comes the govt to the rescue

I have to vent for a minute. The proposed government bailout of US subprime borrowers is just the latest example of the disregard of risk in the system. Now, I truly feel sorry for those new homeowners who were encouraged to enter into mortgages they could not afford. I will refrain from really sharing my viewpoint on the entire chain of people and entities involved in this credit mess. Suffice it to say that the reason I did not buy a house at these favorable rates a few years ago was due to the fact that I was not in the position to afford the mortgage if rates were to reset higher, which I was pretty sure they would. Also, the valuations were too high. The point is that I took the responsible approach and did not buy that which I could not afford. Fast forward to a day ago when the government introduced a plan to freeze these adjustable rates for the next five years. Are you kidding me. I cannot believe I was so naive as to think our government would let us get what we deserve.

This proposed bail out is an insurance policy I didn't know I had. If I had know the government would be there to bail me out of a mortgage I could not afford, you bet I would be living in a house well above my means. Welcome back moral hazard (taking above normal risks because I now have insurance). We saw the markets rally and carry trades put back on (rally in AUS$ and selling in JPY Yen). This is evidence of a moral hazard with regards to risk. I can now take on extra monetary risk because if we begin to experience stress on the system, the government will dive in and bail us out. This can work for a while. Once the government's bail out efforts don't work, watch out, it will get real ugly real fast.

The Wall Street Journal reports:

Battle Lines Form
Over Mortgage Plan

By MICHAEL M. PHILLIPS, SERENA NG and JOHN D. MCKINNON
December 7, 2007; Page A1

WASHINGTON -- In unveiling a plan to help more than one million struggling homeowners, the Bush administration and the mortgage industry have embarked on a controversial project: picking winners and losers from the rubble of the subprime-mortgage meltdown.

Under the deal, formally released yesterday, the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren't yet lost causes. For some homeowners, loan-servicing companies will agree to freeze mortgages at their low introductory rates. In other cases, credit counselors or loan servicers will walk mortgage holders through refinancing processes.

The deal won't provide relief to many subprime-mortgage holders: These include borrowers who are now in foreclosure, have already refinanced their homes or are more than 60 days delinquent on more than one payment over the past year. In some cases, people with good credit scores will be excluded. Also left out are those deemed able to afford the higher interest rates scheduled to replace their introductory rates over the next two years.

The initiative could help stabilize falling home prices and rising foreclosure rates, buoy the mortgage market and provide a modicum of comfort to investors watching the housing crisis bleed into the broader economy.

But it also sets what promises to become a battle line as the subprime crisis plays out over the coming election year. Some critics, especially Democrats, say the plan doesn't go far enough to protect vulnerable homeowners against foreclosure. Others, including some homeowners, as well as those who have watched from the sidelines as home prices have soared in recent years, charge that the plan amounts to a bailout for financially reckless borrowers.